Property investment, long-term security and cash flow

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The key to any investment is long-term capital appreciation, cash flow and a degree of security going forward. There are few asset classes that can match the long-term attractions available with property investment. Indeed, many people now see long-term property investment as the new pension fund of the future. So, what are the benefits of investing in property?

Time and freedom

A well-managed well-structured property portfolio can release a significant amount of time and freedom to your life. You will need to research the best properties, negotiate the best deal and then it is simply down to management. Long-term tenants are the Holy Grail of property investment as there is often minimal contact, regular cash flow and only annual checks and ad hoc issues to address. This creates long term cash flow while creating more time and freedom to either research the next property or enjoy the fruits of your labour.

Cash flow

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Cash flow is the key to any investment, the ability to cover your financial liabilities (or replenish your cash reserves) while leaving a little extra for your next investment or those unexpected costs further down the line. It is possible to negotiate high single figure percentage rental yields and in some cases, HMOs are prime example, even double-digit rental yields. A well-structured, well-managed property deal will be self-financing and as the debt is paid down, your equity/net assets will grow.

While there are many ways to compare and contrast different properties, one of the simplest involves the use of gross and net rental yields. Once these figures have been calculated, it is extremely easy to compare and contrast different property prices, rental income and their comparative value for money. Even though capital gains on property investments tend to be the main focus for may people, cash flow is essential and gross and net rental yields are a useful indicator of value for money.

Leveraging money

In many ways it is the ability to leverage money which is the main long-term attraction to property investment. Mortgage deposits in the UK range from 5% for first-time buyers up to 40%, or more, for those looking to pay more upfront, thereby reducing long-term interest payments. With a 5% deposit, for every £5000 you put down the mortgage company will lend you £95,000. In effect each mortgage payment is an investment in your property, reducing your financial liability while increasing your equity.

Speak to our finance expert to discuss the best way to structure your deal and to arrange finance quickly.

Asset creation

There are specialist buy to let mortgage arrangements which require deposits anywhere from 20% up to 40%. This is where the real long-term value lies, if you can arrange a tenancy agreement which covers all of your financial liabilities, maintenance costs and leaves a little extra for unexpected expenditure in the future. As your equity builds up you can remortgage to raise funds for a deposit for other properties, thereby increasing your property portfolio and income by leveraging your assets. The greater the degree of leverage the more potential gain in the long term but the greater your exposure in the event of a financial downturn or change in your financial situation. Therefore, it is sensible to find a balance between leveraging your assets while protecting the equity you have built up.

Capital appreciation

The long-term goal of any property investor is capital appreciation although secure long-term cash flow is also vital. As your assets appreciate in value in the longer term you need to continually monitor their relative value compared to similar assets. For example, if you bought a property for £100,000 with a 5% rental yield then your income would be £5000 per annum. If the property increased in value to £200,000 and your rental income remained static then your rental yield would fall to 2.5%. At that point it may well be sensible to bank the capital gain and then look to acquire two properties for £100,000 each which offer a rental yield of 5%. In this situation you would have an income of £10,000 per annum and properties worth £200,000 in total.

While there is nothing wrong in retaining assets which have appreciated in value it is sensible to compare and contrast against similar types of property in the marketplace. Is there further scope for capital appreciation? Has the market peaked? How does the rental yield compare to other properties on the market?

Flipping properties for profit

In theory flipping property is fairly straightforward, you buy a property which requires a degree of work, carry out the work and bank the difference between total investment and market value. There are always potential properties to flip but the key to flipping is to get in, get out, minimise your financial costs and bank a profit as fast as you can. The vast majority of those involved in flipping will look to bank short-term profits on a regular basis. This allows them to maintain their cash reserves and as their investment pot increases they can target higher value properties or take on more than one flipping project at a time.

If you buy a property which requires no work then you would expect to pay the full market price. If you buy a property which requires significant work to maximise its potential then you would expect to pay significantly less than the potential market value. The greater the amount of work required, the more investment risk which should lead to a greater discount on potential market value (risk/reward ratio). Flippers also add genuine liquidity to property markets providing a long-term stream of desirable properties.

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Volatility and property markets

Many property investors tend to take a step back during volatile periods such as the Brexit induced concerns surrounding the UK market at the moment. Taking a long-term view, volatility in property prices offers the ability to look beyond the short term concerns and look at the long-term potential. The ability to cherry pick prized long-term assets at below market price, as a consequence of volatility and uncertainty, should not be overlooked. In volatile markets cash always tends to be King (or those with mortgages already agreed and available) with sellers often looking to liquidate assets as quickly as possible.

Conclusion

There needs to be a degree of volatility and risk to create any type of investment return in the short, medium or long-term. Due to the large number of properties in the UK, the type of properties and changing demographics, there are always opportunities for short, medium and long-term investors. Long-term cash flow is vital to any investment structure, long-term appreciation is an aspiration and finding the balance between cash flow and appreciation is the key.

People now view long-term property investments as their pension funds of the future. The ability to create long-term cash flow and long-term capital appreciation is paramount when maximising long-term returns. As the UK population continues to grow, demand for private rental accommodation will undoubtedly build as sure as night follows day.

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